Two researchers from the Banca d’Italia discuss the difficulties of analysing the present and the future in light of the economic situation we are currently experiencing
Predicting, or rather, speculating about a future that will never be as it we once thought it would. In any case, attempting to “be ready” for events in both the near and distant future that will affect social communities, businesses, production organisations and individuals. Forecasting has always been a fascinating (and dangerous) exercise. And now, this exercise has taken on even more complex undertones and connotations. Yet in one way or another, it still needs to be addressed. This is something that also applies to entrepreneurs and managers, and which must be approached with a profound awareness of the difficulties that lie ahead for us. Within this context, reading “Previsioni ai tempi del Coronavirus” (“Forecasting in the era of the Coronavirus”), written by Alberto Locarno and Roberta Zizza (of Banca d’Italia) certainly represents a good step forward in gaining a better understanding of the reality of the situation.
The two researchers begin their argument with the observation that “due to the virulence of its impact on society and the economy, the Covid-19 pandemic also represents a challenge for those responsible for forecasting”. Indeed, the challenge is so great that the expression “this time is different”, which was “last in vogue during the Global Financial Crisis, although appropriate, is nonetheless not sufficient to describe the gravity and the exceptional nature of the current emergency”.
The problem highlighted by the two authors is simple: the difficulty is derived from the lack of information on the true evolution of the contagion, a scarcity that in turn is due to the dearth of reliable statistical information and the presence “of new routes of transmission, through which the health crisis is affecting the economy”. In short, those who make predictions for a living now find themselves floored; they lack the basic elements they need to be able to carry out a proper analysis, which is the basis for providing a reasonably reliable forecast of what is likely to happen in the future. This is something that applies to everyone, and as such, to all companies that are facing suspended investments, balance sheets with unexpected costs, new organisational issues and more.
Locarno and Zizza’s essay, however, strives to strike a balance between the uncertainty that economic and social systems are currently experiencing and the need to give shape to analyses that are sufficiently trustworthy. Having taken an in-depth look at the factors that make forecasting more difficult, the authors move on, examining the potential developments that could occur through the use of the short and medium-term forecasting methods developed by the Banca d’Italia. As such, they outline a potential future for forecasting, where indications with a good degree of certainty are accompanied by hypotheses that will need to be verified over time.
The text by Locarno and Zizza is worth a read, not so much for the indications it provides with regard to what may happen in the future, but rather in order to gain a better understanding of the challenging situation we must wrestle with when formulating or using these forecasts.
Alberto Locarno, Roberta Zizza
Banca d’Italia, Covid-19 Notes, 11 May 2020